The Brexit vote has caused a significant rise in prices, especially food

Since the referendum, UK inflation has risen faster than that of the Eurozone. Price rises have varied across sectors, but Josh De Lyon, Swati Dhingra, and Stephen Machin(LSE’s Centre for Economic Performance) show that the rise in the growth rate of food prices has been particularly pronounced. As a result, real wage growth in the UK has again turned negative.

The pattern of significantly higher price inflation is shown in Figure 1. This plots the annual consumer price index (CPI) before and after the Brexit vote, comparing the UK with what has happened in the 19 Eurozone countries. To a large extent, the CPI growth rates of both the UK and Eurozone move together, with both being driven by worldwide commodity prices.

The index is a cumulated annual index and so only shows the full effect of the referendum from May 2017, when it is no longer diluted by pre-referendum data. Taking this into account, the spike observed shortly after the referendum is significant. It is likely to have been driven by the devaluation of sterling, which occurred immediately after the referendum result.

The full effect is indicated by the divergence of CPI annual growth rates between the UK and the Eurozone a year after the referendum. This divergence in consumer price inflation partly reverses the convergence in price changes that occurred in the single market, when price dispersion of tradable goods started to converge to levels seen across US cities by the mid-1990s (Rogers, 2001).

For certain commodity groups, the increase in the CPI growth rate has been more pronounced. Figure 2 presents the annual growth rate of CPI where the sample of goods and services is restricted to food. There is a distinct and substantial rise in the rate of CPI food inflation for the UK relative to the Eurozone.

The divergence that immediately followed the referendum is quite a bit larger than that observed for all goods in Figure 1, and becomes larger when amplified over time. This has important implications for how the vote has affected the purchasing power of different income groups. Low-income households spend a higher proportion of their income on food than rich households.

CC0 Public Domain

The UK experienced several years of real wage falls following the financial crisis of 2007/08, but in the period before the referendum, real wage growth in the UK had become positive (see Blanchflower and Machin, 2016; Blanchflower et al, 2017). This arose because of very low inflation, not because of any strength in nominal wage growth (which seems to have become stuck at a norm of 2% per year since the start of the decade).

But the increase in prices following the Brexit vote coupled with no significant rise in nominal wages has again caused real wage growth to become negative. This is shown in Figure 3, which indicates that the real wages squeeze is back because of the post-referendum price increases.

By the end of our data period, the price increases following the referendum have now fully appeared in the annual index. It seems that the Brexit vote has caused a one-off rise in prices, and that the annual growth rate of prices will begin to fall out of the index once it no longer includes the months that immediately followed the referendum.

Overall, this research points to a significant rise in prices occurring after the EU referendum. Future work that builds on these initial findings will quantify the role of the devaluation of sterling by focusing closely on price changes for imported goods and services.

This post represents the views of the authors and not those of the Brexit blog, nor of the LSE. It is based on the LSE’s Centre for Economic Performance report Brexit: the impact on prices.

10 Comments

Personally I just do not see this in practice. I shop primarily at Aldi for food and so know the prices. What I am seeing is a fall in prices on a lot of goods. They source a lot of the vegetables from the UK and the prices are incredibly cheap. Perhaps they watched Hugh F-W food waste programs and are buying up all the non perfect veg the big 4 reject. Having said this butter has shot up in price.
I really wonder if this is the large branded food companies putting up prices because they thought they could get away with it aka the Marmite case.

I regularly shop at the main big supermarkets, ASDA, Tesco, Sainsburys, Morrisons (I have no loyalty to any) and have seen my food bills go up quite dramatically over the last 18 months, over all four.

At last a survey that reflects my experiences. Food / grocery shopping has increased by 13% since the week after the referendum. Butter, as ralphmalph comments, has gone up significantly our brand of choice has risen from from 85p to £1.35.

Prices are up because we’re an importing nation and we took a decision that significantly reduced the value of our currency. Inflation has been feeding through to consumer products since the referendum and continues to do so.

انجمن رمان ایران سایت رمان ایران
Prices are up because we’re an importing nation and we took a decision that significantly reduced the value of our currency. Inflation has been feeding through to consumer products since the referendum and continues to do so.
And it may well get worse when we actually leave.

[…] plunged after the referendum, making it more expensive to buy goods from abroad. That, in turn, has pushed prices up in the shops. Inflation has shot up to 2.7% from 0.5% in the month of the referendum. Because wages […]

We use cookies on this site to understand how you use our content, and to give you the best browsing experience. To accept cookies, click continue. To find out more about cookies and change your preferences, visit our Cookie Policy.